The Tax Battalion

As I was looking around on the redesigned IRS website today, I came across the “Understanding your IRS Notice of Letter” page and was reminded how much I like it. It features a table of IRS notices organized by notice number, and including a short description of the notice content in plain language. This is a good resource for taxpayers who have no idea what they received in the mail and who just need a tax relief starting point. And it’s nice that the IRS is making changes to its notices and letters so they are easier to understand, even though the most common phrase on these notices is:

You owe money on your taxes as a result of these changes.

Coincidentally, I did come across a couple notices that seem to suggest that the IRS is looking out for the taxpayer by pointing out tax advantages that were not claimed:

CP08 – You may qualify for the Additional Child Tax Credit and be entitled to some additional money.

CP09 – We’ve sent you this notice because our records indicate you may be eligible for the Earned Income Credit (EIC), but didn’t claim it on your tax return.

When I saw today that TIGTA had audited the IRS new-hire integration process (something the IRS calls “onboarding”) and concluded that the IRS is not always making new employees feel welcome and not always making it a positive experience, I immediately imagined that there is some kind of mild hazing going on at the Service. Maybe the stapler set in a jello mold trick, or the cell phone in the A/C duct trick, or the gift-wrapped work station prank, or any other form of office shenanigans.

I guess I was slightly disappointed to learn that the onboarding deficiencies that TIGTA identified were far less interesting; things like not being assigned a mentor or not being helped to reach their full potential. Maybe they need to lighten up a little at the IRS, cut the taxpayer a little slack, think twice before issuing a wage garnishment or a bank levy just before Christmas. Office pranks at least show some creativity. But IRS personnel are trained to work like robots; they aren’t allowed to be creative.

To be fair, there are some IRS employees who think outside the box but its almost always those who have several years of experience. The IRS needs to improve its onboarding if only to reduce turnover.

California attorney Kevin Mirecki has been sentenced to six months in federal prison after pleading guilty to three counts of failing to file his tax returns and will not obtain tax relief. Mirecki was also ordered to pay more than $225,000 in restitution and fines. Mirecki entered his guilty plea in 2009 and admitted he failed to report more than $1.3 million in income over a three-year period.

Mirecki also founded Genesis Fund Ltd., which investigators say was a foreign-currency Ponzi scheme that bilked at least $80 million from hundreds of investors. Eight people pleaded guilty and another was convicted at trial in connection with the scam.

According to the indictment related to Genesis Fund Ltd., the defendants falsely claimed that investors received monthly returns of four percent, when investments were actually used to make “profit” distributions to defendants and early investors. The defendants promoted the Genesis Fund as having no reporting obligations to the IRS. Bank accounts in the names of trusts and offshore bank accounts were allegedly used to receive distributions from the Genesis Fund that were not reported to the IRS. Some of the defendants allegedly created “disclosed” and “undisclosed” Genesis Fund accounts for themselves and certain fund investors in order to conceal from the IRS all but a small portion of the fund’s distributions. In addition, some Genesis Fund investors were allegedly advised to create nominee offshore corporations and bank accounts to receive distributions from the fund.

The indictment further alleged that to obscure the operations of the fund and to limit scrutiny of its operations by investors and the government, the defendants caused the Genesis Fund to maintain no financial statements or other statements of operation. Additionally, in or about April 2000, to conceal the true nature of its operations from investors and the government, Genesis Fund’s administrative operations were relocated from Anaheim, Calif., to Costa Rica. At about the same time, paper records were moved to Costa Rica and electronic data on computers was destroyed.

What are some of the things you do on a daily basis? Brush your teeth, check your email, read a favorite book? Even though it may not be apparent to most of us, the IRS actually has a daily routine too: processing tax returns.

But this wasn’t always so. Before 2005 the IRS operated on a weekly processing schedule. In other words, what showed up in IRS computer systems could be out of synch with what was sitting on somebody’s desk for up to a week at a time.

TIGTA recently audited the IRS’ daily return processing performance with favorable results. However, it is still a work in progress; there are certain tax returns with “qualifiers” (or codes) that prevent daily processing. Some of the qualifiers include:

The IRS has gradually revealed some important changes to its tax collection procedures over the last several months under the “Fresh Start” program. What began as a patchwork of provisions scattered here and there, has now been organized under its own tab on the homepage of the IRS website. Most of the changes are now in effect, even though they have not made their way into the Internal Revenue Manual yet (see Interim Guidance Memo on changes to Offer in Compromise process).

In an effort to provide further guidance regarding the IRS Fresh Start program, the IRS is offering a free webinar on September 12th. The webinar is entitled “Payment Alternatives – When You Owe the IRS,” so it is not 100% focused on Fresh Start. It is supposed to cover Installment Agreements, Currently Not Collectible Status, and Offers in Compromise, hopefully presented through the lense of the Fresh Start program. One of the bullet points is “Fresh Start enhancements.”

The presenter for this webinar will be Traci Suiter, Lead Public Affairs Specialist of the Small Business / Self-Employed division of the IRS. Other IRS representatives will participate in a Q&A segment.

Filing an Offer in Compromise (OIC) can be quite an ordeal if you’re not prepared. If the IRS decides your offer is worth considering, then they will look very carefully at every aspect of your finances, including assets, income, and expenses. The result of this analysis is your “reasonable collection potential” (RCP) — the single most important factor in determining whether or not your offer is accepted.

When the IRS looks at expenses, they determine which ones can be allowed, and of the expenses that can be allowed, how much can be allowed. Generally speaking, more/greater expenses result in a lower RCP and a lower offer.

Formerly: The IRS did not allow payments made pursuant to a state or local tax installment agreement (IA) in the RCP analysis. The underlying reasoning for this was that the laws of the federal government trump the laws of state and local governments when it comes to collection of revenue. The IRS simply ignored the practical realities of the situation.

Currently: Under the Fresh Start program, the IRS will allow state or local tax installment agreement payments — not all of them all of the time, but compared to the way the IRS used to treat them, this is a step in the right direction and very good news for those in need of tax relief.

Thanks to the IRS’ Fresh Start program, more people meet the criteria for an Offer in Compromise these days than quite possibly ever before. Many of the requirements have been modified in determining a taxpayer’s reasonable collection potential (RCP), one of them being the way the IRS deals with dissipated assets.

Formerly: A dissipated asset usually consisted of property that was sold or distributions that were taken, sometimes years before the OIC filing date. If the transaction occured after the tax was assessed and the money was used for anything other than paying down the back tax debt, then an amount equal to what was received would be automatically added to the taxpayer’s reasonable collection potential, even if the money was long gone. The burden was on the taxpayer to avoid inclusion of a dissipated asset by showing that the funds were spent on the necessities of life and not on a ski boat.

Currently: Inclusion of dissipated assets in RCP is no longer applicable, unless it can be shown (presumably by the IRS) that the funds were spent on a ski boat or other unnecessary items, or that the funds were intentionally pissed away in an effort to avoid having to pay the IRS. It now appears that the burden is on the IRS to substantiate their hunches whereas before there was a presumption that the taxpayer was purposefully avoiding payment to the IRS.

When tax relief seems like a distant dream, some people turn to humor . . . especially comedians. Chris Tucker is still not out of the woods with the IRS, but he has NO problem laughing about his tax problems. Follow the link below to a hilarious recent video:

Tucker is back in the public eye these days touring around doing stand-up. When asked what got him back, he jokes that it was the IRS. He says the IRS told him he needed to get back out there and make some money. “I made a lot of money in the past,” Tucker says, “and I thought it was all mine.”

Tax policy jokes? He’s got those too. Obama’s raising taxes (which he can’t afford to pay), but he will still be voting for him. And he promises to pay his taxes “when Mitt Romney pays his.”

Tucker’s plan is to keep touring (a tour he has dubbed the “IRS Tour” or the “Help Your Brother Out Tour”) and making money to try to get his finances back in order. He thinks the IRS might just show up at one of his shows in Dallas to collect the tax debt, so he has to be on his best behavior and continue to live within his means. “I ain’t buying no more cars, no more houses. Me, Jermaine Dupri, and Toni Braxton are getting a condo together.”

Occasionally our clients are strapped with other unsecured debts besides their tax debt and they seek advice on whether or not they should file bankruptcy, believing that a bankruptcy would wipe out everything they owe.

Sometimes it makes sense to file bankruptcy to achieve tax relief, but it is definitely not for everyone. There is a formula used to determine if your tax liabilities may legally be discharged in bankruptcy. Tax debts more than three years old are normally dischargeable, but this is only the general rule. Each tax year must meet a fairly elaborate set of criteria (they are called “eighth priority” taxes by the IRS) otherwise they are not dischargeable in bankruptcy.

In a chapter 7 bankruptcy, besides taxes that are entitled to eighty priority, the following tax liabilities are not subject to discharge:

taxes for which no return was filed

taxes for which a fraudulent return was filed

taxes that the taxpayer willfully attempted to evade

taxes for which a late return was filed (after 2 years before the bankruptcy)

Attorney Advertisement. Tax Attorneys Montgomery & Wetenkamp are licensed by the State Bar of California, are licensed attorneys authorized to practice before the United States Tax Court, and may practice before the Internal Revenue Service (IRS) as attorneys in all 50 states. Sacramento Tax Attorneys and Modesto Tax Attorneys Montgomery & Wetenkamp perform all services in Sacramento, California and Modesto, California. The content of this website is for informational purposes only and does not constitute legal advice. The tax information contained on this website, is not intended to be used, and cannot be used, referred to or relied upon, for the purpose of avoiding tax-related penalties under the Internal Revenue Code or promoting, marketing, or recommending to another party any tax-related transaction or matter addressed herein. Past successes cannot be an assurance of future successes because each case must be decided on its own merits and will differ if based on different facts. Full disclaimer provided on our disclaimer page and is incorporated herein by reference.

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